We do not see the dilution
People join the nation they like, but the majority still picks traditional nations (like SWEDEN ;)) .
And in terms of the buyers - here are the top 10 countries, ranked by sales, who are buying the game after custom localization file has been added
The two puzzling facts
Poland buying more copies than UK
US should be the most numerous nation but it is not.

I suggest you to not jump to conclusions with other nations and focus on nations that exist in game focusing on the topic discussed (too many nations = reduce nations).
Caribbean is just another theater of war. And players come there for different reasons. British players come to rule the waves, German players come to change history and claim all those colonies for themselves. This is what the game is for. Your opinion on Prussia in the Caribbean is irrelevant to players who join Prussia to face the impossible. You are just proposing to cut their gameplay away from them. We are not going to do that.

alliances were removed for 2 reasons
they reduced number of targets
they remove the political component (complex political discussions, agreements, betrayals were replaced by a button)
We do not see how alliances can come back

First version of the game did not even have nations and it was planned to be this way initially.
Steam page does not contain any lists of nations just like the steam green light page.
The website mentions nations that were initially planned but the website has not been updated for like 3 years and still lists 10 ships existing in game.
We already stated that will add or remove nations as we see fit to improve gameplay for all players - which on the PVP server means one thing = we must bring more targets.
Historical considerations will always be taken into account but posters who claim nations like Kingdom of Prussia are absurd and non historical will never be taken seriously.

To sum up.
If the desire and benefits to create larger blocks will overcome everything else
The potential solution in the future will be to have 3 Coalitions.
Yet when starting to write the coalition compositions they all break down because we KNOW many players will want to sail under their historical flag AND will not want to be in a coalition with a forced country
Example
USA/France/Spain/Portugal?
Sweden/Norway/Denmark/Poland?
Prussia/Austria/Russia/Dutch?
Britain +?
Barbary coast/Turkey/Venice?
East India Coalition (Qing Dynasty, Japan, Mogols,?)
Pirates
We are still ending up with 5-6 blocks anyway, and if we go above 3 it becomes irrelevant how many we have.

This is a game and the only map is the Caribbean. This is the world. Nations and players build logistics for themselves.
A player comes into caribbean and buys and apple for 1 real
Then he sells it for 2 reals in a hub
Then he buys 2 apples
Then 4
Then he robs a trader brig and gets 5600 doubloons
… And so it goes.
I do not see how historical supply routes are relevant to the game we are playing. You sail what you make or capture. You own land if you captured it.
This statement would be relevant for Caribbean in 1753 History channel tv series. Not for the game.
Historical alliances and agreements have no relevance to the game we are playing. In 1814 after Battle of paris the french given the key to Paris to the Russian Tsar and Prussian King. Yet both Prussia and Russia did not go for the French colonies and (for example taking over the french fleets as reparations). In the game the choices are made by the player. In reality Prussia did not care much about the caribbean, and focused more on Africa. In the game there is no africa. Players go for what they can go for.
Given things described above (sandbox where historical nations fight for a certain piece of land - in our case caribbean) and knowing that all nations are in permanent war - your comment is flawed. Because there are no a-historical nations present in the game and all could (if they tried hard) to fight for land available for them.
The only questions on the table that are relevant are the following Less vs More
Less nations = better rvr, but less pvp (less targets)
More nations = harder rvr for some, but a lot more pvp.
Merging nations into alliances were tried and the problem remained - there will be 1-2 large alliances and one weak alliances. Players tend to unite and gang up on the weak. So we think that more nations is better, because there is always a choice available to be against all. 3 alliances will remove this option.
But as many said here: its the game - we must think for the game first history second.
Thats why Russia/Prussia/Poland was added. They increased the fluidity of the map and helped test that nations can live without non-capturable ports.
Qing Dynasty Question
If china is added and allowed - then all large naval nations (who at least are on the top buyers lists) could be allowed. But only china will change the dynamics. Turkey is not even on top 30 countries by sales. Barbary coast will take some players from pirates but it will be a minor force. Portugal will be a very low population nation.
Without china the balance will always be 60-70% to GB/Pirates: 60% of players will sail for pirates and Britain. It was like that in POTBS and it will always be this way in age of sail games. With China - the main force by population will be Qing Empire.
It will be great for pvp/rvr (great for the game and conflict) but for some players it will reduce immersion.

Previously games were inserting only 3 nations into age of sail games (sometimes 4), we actually bothered to research the map and ask questions why Christiansted exists in the Virgin islands. We also wanted to get USA into the game right when we started development
As for small nations. You can conquer the world as small nations in many historical games, THAT'S the purpose of the historical games - to re-live history or CHANGE history.
The Rubicon has been already crossed in 2015 by addition of Denmark, Sweden and United States.
We love community feedback, but its impossible to go to 3 nations for two reasons
Reason 1. Many users do want their nation in game and want to sail their flag
Reason 2. I like it.
(but there is of course an option to have enforced alliances that will naturally reduce the nations)
PS. On your They could not because logistics comment
Even Brandenburg could
https://en.wikipedia.org/wiki/German_colonization_of_the_Americas
Everyone arrives to the Caribbean in a basic cutter anyway. Its up to you to stop them from expanding. And here i will repeat our proposal. You will not remove them by typing on the forums
If you do not like other nations - crush them, see them driven before you, hear the lamentation of their women in chat!

Those pesky invaders
You should file a complaint with the Admiralty or the house of lords. As a lord you already knew importance of colonies, so as other nations are slowly recognizing that. If you do not like other nations sending fleets to take your colonies you should maybe declare war on them?
There are no unhistorical nations there are just unhistorical wars. Which COULD happen. We are not going to change the number of nations and the number of nations (impossible) will not go down and might tend to go up. I have heard Qing Dynasty roleplayers are extremely eager to take revenge on the GB under the dragon flag.

Prussia could build a couple of wapens and send it to Caribbean to trade and expand. Several German states HAD colonies in the Caribbean. Its a sandbox and Caribbean is just a map. Big historical nations have all the power to send all smaller nations back to Europe.

I am sorry but you are asking the game to do something for you that you can do yourself.
you can remove the nations youself by using in game tools. Capture all the ports controlled by Prussia and many players might re-roll as they lose access to admiralties and life becomes a bit harder.
players can also remove nations by just re-rolling by re-creating the character (M&C rank is safe after exams) or buying the DLC which is 12 times cheaper compared to re-roll cost in some other MMOs
If 3 players want to sail for a small nation we will let them be. We are not going to tell them to move to another nation - they can make this choice themselves.

GB does not care unfortunately. GB and Pirates are always were and will always be most numerous nations. They were 50%+ with 8 nations and are 50%+ with 11. adding new nations will not change the % of players rolling Britain and Pirates.

I would reframe your question in a different more positive way. Do you really want to keep artificial 100% bonus in DPS for lower caliber guns? Do you really want to keep an artificial 100-200% bonus in HP for smaller ships? If yes, why not make all ships to have the same DPS and Same HP and same speed and turn rate so skill will remain the only thing that matter?

Yes. Finally we see. But they do not have bonuses for turning they just use yards well and do not make mistakes - as a result they SEEM to turn too well.
This problem is identified and we improving it.

Testing it every day.
And no it's not going from bad to very bad. You finally see and feel the difference between ships which gives you the natural desire to upgrade the vessel and get better.
Bigger ship = dangerous. Previous dogma that basic cutter can sink everything up mid level 5th rates now feels like a huge mistake.